Evolution toward Fit

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Scholars in a variety of literatures have conceptualized firms as systems of highly interdependent elements (e.g., Miller, 1981; Milgrom and Roberts, 1990; Porter, 1996; Levinthal, 1997; Whittington et al., 1999). In these analyses, organizational elements such as firms' activities, policies, structural elements, and resources are seen to form complex systems, or configurations. Although scholars have established a long time ago that consistency, or internal fit, among an organization's elements is positively correlated with performance (e.g., Khandwalla, 1973; Drazin and Van de Ven, 1985), research about how organizations evolve toward such configurations of tightly reinforcing elements is much less developed (Miller, 1996). Moreover, no adequate vocabulary exists that would allow a consistent description of organizations' developmental paths toward configurations--a vocabulary that would be helpful in developing further theory that links organizational development and organizational performance.

In describing organizations, many scholars have argued that some organizational elements are more central or core to an organization than other, more peripheral elements (Hannan and Freeman, 1984; Singh, House, and Tucker, 1986). For instance, Hannan and Freeman (1984:156) identified as "core aspects of organization" the organization's stated goals, its forms of authority, its core technology, and its marketing strategy. While the distinction between core and noncore elements has become common in the organizational literature, little progress has been made to date in distinguishing them systematically. As a result, Hannan, Burton, and Baron (1996: 507), summarizing the research efforts concerning organizational core elements, concluded, "Although there seems to be a general agreement that some organizational features fall nearer the core than others, we see no consensus on exactly what constitutes the core."

To better understand the nature of core elements and the underlying developmental processes that lead to configurations, I engaged in an inductive study of the developmental path of The Vanguard Group, the second-largest mutual fund provider in the U.S. Through an iterative process, involving the data of the case, existing literature, and broader conceptual reasoning about organizational evolution, I identified four developmental processes that were intimately related to the creation and further elaboration of organizational elements that had core characteristics. To define these developmental processes more tightly, a characterization of organizational core elements was required that allowed a systematic identification of such elements. As a result, the inductive study of the developmental processes went hand-in-hand with creating a methodology that allowed the identification of an organization's core elements at various points in the organization's history. To identify core elements, the notion of interacti ons among the elements of an organizational system played a key role.

ORGANIZATIONAL CORE ELEMENTS AND ORGANIZATIONAL SYSTEMS

In previous work, core elements of organizations have been identified by declaring ex ante a number of critical activity domains and then selecting variables that represent these domains. For instance, Miller and Friesen (1982), in their study on quantum changes, measured structural variables falling into three categories: uncertainty reduction (e.g., use of formal rules), differentiation (e.g., decentralization), and integration (e.g., use of coordinative committees). In a similar vein, Romanelli and Tushman (1994:1147), in testing the punctuated equilibrium model, argued that organizational culture, strategy, structure, power distributions, and control systems are "important to organizational survival and central to organizational activities" and thus form core activity domains. Changes in these activity domains were measured by introductions of new product lines (strategy change), by general reorganizations of the firm (structural change), and by turnover of senior executives (power distribution change). D ue to data limitations, they dropped the culture and control systems domains from their analysis.

The advantage of an ex ante specification of core elements is that changes in these elements can be measured consistently across firms. The disadvantage of this approach is that it assumes that the same elements are equally central or core in all firms. Empirical evidence suggests, however, that the same elements are not equally central in all firms. For instance, Singh, House, and Tucker (1986) argued that chief executive change is a peripheral change in their

sample of voluntary social service organizations, while Romanelli and Tushman (1994) coded such a change as a core change for their sample of minicomputer producers. The ex ante specification approach also implies that the number of core elements is constant across different firms and constant over time for any given firm. Rather than specifying core elements (or domains from which core elements are selected) ex ante, it may be preferable to identify core elements more directly.

Even though the organizational literature contains no agreement as to what particular elements should be included in an organization's core, consensus exists as to the properties of an organizational core element. In particular, an element is said to belong to the core if it has one of the following two features: (1) a high interdependency with other current organizational elements and (2) a large influence on future organizational elements. As to the first property, Hannan, Burton, and Baron (1996: 506) noted: "A feature forms part of the organizational 'core' if changing it requires adjustments in most other features of the enterprise. A feature lies at the periphery if it can be changed without imposing changes on other features. . . . Coreness means connectedness, elements in the core are linked in complicated webs of relations with each other and with peripheral elements." Thus, an element is core if it interacts with many of the organization's other elements. The second property of a core element is its profound effect on future organizational elements. Studying core elements of employment relations, the sum of which the authors call an "organizational blueprint," Baron, Hannan, and Burton (1999: 531) noted, "once formulated and articulated, a founder's organizational blueprint likely 'locks in' the adoption of particular structures; it also 'locks in' certain premises that guide decision-making." Thus, an element is a core element if it affects or interacts with many future elements. Taking both features of core elements into account, I define an organizational core element as an element that interacts with many other current or future organizational elements.

This definition implies that the number and identity of organizational core elements might not be constant over time. Over any period of time, a firm might add a new core element, delete a core element, or replace a core element with a new one. Besides changing core elements (typically a rare event), an organization is engaged in supporting or elaborating its core elements. For instance, as will be described in more detail later, one of Vanguard's core elements was a policy to engage in candid communication with its clients. Other organizational activities that elaborated this core element included clearly written annual reports, letters to shareholders warning them that high performance of certain funds was unlikely to continue, and "Plain Talk" brochures that explained fundamental issues of investing. Each core element of an organization is thus supported over time by a series of elaborating elements, which are defined as organizational elements that reinforce existing core elements.

The definitions of core and elaborating elements use the terms interaction and reinforcement, which deserve further explanation. I use a definition of interaction that has been used in the literature on complex interdependent systems (e.g., Rivkin, 2000). Two elements are said to interact if the value of one element depends on the presence of the other element. In particular, two elements are said to reinforce each other if the value of each element is increased by the presence of the other element, that is, if the two elements are complementary to each other (Milgrom and Roberts, 1990). Examples of reinforcement can be found, for instance, in Raff's (2000) description of the bookstore chain Borders. Given Borders' focus on having a wide assortment of books available in each store, investments in software that allowed tracking of inventory and enabled better sales forecasts became more valuable. Conversely, given a sophisticated inventory and procurement system, an increase in book selection within stores was made economically more feasible. Both elements reinforced each other. Analogously, in the context of manufacturing, flexible manufacturing systems and wide product variety are complementary elements, reinforcing each other: the wider the product variety, the more valuable are investments in increasing the flexibility of the manufacturing system; and conversely, the more flexible the manufacturing system, the greater the benefit (i.e., the lower the cost) of increasing product variety (Jaikumar, 1986; Milgrom and Roberts, 1990).

Interactions can exist both between and among elaborating and core elements. An elaborating element usually reinforces at least one core element, and each core element interacts with many elaborating elements. An elaborating element may interact with more than one core element and with other elaborating elements as well. Not every elaborating element has to interact directly with a core element. An element may elaborate a core element indirectly via another elaborating element that directly interacts with the respective core element. Finally, core elements themselves may interact with each other. A firm with many organizational elements that reinforce each other is said to have a high degree of internal fit (Siggelkow, 2001). This notion of fit is consistent with Miller's (1996: 511) suggestion that "the fit among the elements of an organization may be evidenced by the degree to which strategy, structure and systems complement one another."

Not all organizational elements interact with each other. If the value of an element is independent of the presence of another element, both elements are said to be independent from each other. Moreover, a firm may adopt elements that are inconsistent. For instance, in the early 1980s, many u.s. firms did not pair their investments in flexible manufacturing systems with a change in product variety or increased training for their employees but continued with high-volume production of a few parts produced by employees with relatively low levels of skill (Jaikumar, 1986). The combination of these choices created a misfit between manufacturing and product strategy, leading to a decline in performance as compared with using conventional technology (Jaikumar, 1986).

At any point in time, one can thus describe a firm as an organizational system composed of various types of elements (core elements, elaborating elements, independent elements, and inconsistent elements) and the interactions among these elements. (1) This conceptualization of an organizational system has a close parallel in Porter's (1996) notion of an activity system and in Miller and Friesen's (1984) notion of a configuration. The concept of an organizational system is broader, however, than the notion of a configuration. The term configuration usually implies that the core elements are reinforcing, such that the overall system is in a state of coherence or consistency. For instance, Miller and Friesen (1984: 21) noted, "Configuration, in essence, means harmony." In contrast, an organizational system may well consist of core elements that are not reinforcing. A possible definition of configuration is thus an organizational system with no inconsistent core elements and a number of reinforcing core elements.

The existing literature thus provides a number of concepts that allow one to describe an organization at a point in time: at the detailed level of the organization's core elements, its elaborating elements, and the interactions among these elements or; at a higher level, by matching the organization's configuration to one of the configurational ideal types proposed by various researchers (e.g., Burns and Stalker, 1 961; Miles and Snow, 1978; Mintzberg, 1979). How an organization evolves over time toward such a full-fledged configuration and how to describe such development appear to be open questions, however. It was to answer such questions that I undertook the inductive study of The Vanguard Group.

METHODS

Research Setting

Studying the underlying processes of organizational development required a research setting that allowed an analysis of an organizational system, comprising elements and interactions, at various points in time. The Vanguard Group had several features that made it suitable for this purpose. First, Vanguard was founded in 1974, providing more than 20 years of data, while members of the firm could be interviewed, including the founder, who had experienced the entire history of the firm. Second, and more important, founder John Bogle, who played a pivotal role in the development of Vanguard, had been a prolific writer; penning dozens of speeches and memos throughout his career, even before becoming the leader of Vanguard. These documents provided an excellent opportunity to gain insights into the contemporaneous thinking of Bogle at various points in Vanguard's history. Moreover, these documents served as a check to retrospective sense-making and potentially biased memories of interviewees (Golden, 1992). Third, due to its unique organizational structure (explained below), Vanguard enjoyed extensive press coverage, generating a large amount of secondary data that were helpful in identifying Vanguard's organizational system throughout its history.

Data Collection

To map out Vanguard's organizational systems, I used a longitudinal case-study design (Eisenhardt, 1989). The research was carried out in three stages. In the first stage, I primarily relied on secondary sources and several company documents to develop a chronology of Vanguard's organizational elements from its inception to the beginning of 1997. I further started to identify interactions among elements and to create maps displaying the elements and interactions. In the second stage, I engaged in a series of interviews with members of Vanguard's management team to amend the maps. I discussed both the elements contained in the maps and the interactions among them. The third stage involved in-depth interviews with John Bogle and an analysis of the memorandums and speeches he prepared throughout his career, leading to further refinement of the maps. While these three stages broadly describe the research process, the overall creation of the maps depicting the organizational systems was much more iterative. Whenev er I gathered new information either through interviews or archival material, I triangulated (Miles and Huberman, 1984: 234) the information through interviews with different members of the organization or through other archival material before refining the maps. …

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